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Business and Financial Policies and Procedures

Conduct a Physical Inventory to Adjust Your Merchandise Inventory Record

Before You Begin

All units with merchandise for resale, regardless whether the perpetual or periodic inventory method is used, must:

  • Annually conduct physical inventories of their merchandise on hand.
  • Adjust the recorded inventory valuation to match the results of the physical inventory.
  • Report the adjusted level as of June 30 to University Accounting and Financial Reporting (UAFR) in the Year-End Fact Sheet.

The unit business manager, unit head, or dean must ensure that an overall plan to conduct an annual physical inventory is established and documented. The plan should provide for a controlled setting to ensure all items are counted and that each item is counted only once.

Begin

To conduct a physical inventory to adjust your merchandise inventory record:

  1. Schedule the inventory:
  • Schedule the inventory for a time when movement of goods in and out of inventory storage will be minimal, if at all.
  • If the inventory is not scheduled for June 30, establish measures to track any receipts or removals of merchandise between the inventory date and June 30.
  • Ensure that written instructions for all staff conducting the inventory, along with current floor plans, count sheets, and supplies needed, are available on the date the physical inventory is conducted.
  1. Prepare to conduct the inventory:
  • Prepare count sheets.
  • Count sheets should list all the inventory items to be counted and provide room for notations of number counted, unit of items counted, descriptions, and location of each inventory item (for example, 12, 1 case, light bulbs, Room 23/Aisle 7/Shelf 2).
  • If your unit uses a perpetual inventory system, do not include on the count sheets any notations of quantities from the perpetual record.
  • Assign “counting teams” to count merchandise in specified locations, to ensure all storage space is covered.
  • Distribute count sheets.
  • Instruct staff not to count any inventory:
  • On consignment.
  • In the receiving process and not yet included as perpetual inventory stock.
  • In the shipping process and already removed from perpetual inventory stock.
These items should be tracked separately so they can be added to the inventory record when the formal count of items in stock is completed.
  1. Conduct the inventory:
  • Counting teams must:
  • Move through their assigned space in a systematic manner to ensure that all storage space is examined.
  • Make sure they record on count sheets every item of merchandise in the space, unless on consignment or in process for receiving /shipping.
  • Note whether any merchandise has been stored for some time and may be obsolete.
  • If your unit uses a perpetual inventory system, no individual involved in receiving and maintaining the inventory record may participate in the physical inventory.
  1. After counting the inventory:
For perpetual inventory only - an individual other than a counter or the perpetual inventory record keeper must compare the physical inventory count to the perpetual inventory records and reconcile discrepancies, to verify the actual count. Note any discrepancies between perpetual record and counts:
  • Count again to verify the original count was accurate.
  • Review the perpetual record for the discrepancy items to ensure that no items in transit (received but not stocked or shipped but not removed from perpetual record) were included.
  • Write down the reconciliation results on the count sheet and clearly indicate the final, accurate count.
  1. Compute the inventory record valuation to reflect the results of the physical inventory count.
  • Perpetual inventory units:
  • If the record and the count were different, adjust the quantities of the perpetual inventory record for each item.
  • Adjust the value of those items using the valuation practiced by your unit, such as First-in First-out (FIFO) or Moving Average.
  • Compute the revised value of the total and adjust the perpetual inventory record accordingly.
  • Periodic inventory units:
  • Value each item in the merchandise inventory using the FIFO method. Use purchase prices based on invoices for the items most recently purchased and then move backward to older invoices until the quantity on hand has been accounted for and valued.
  • Once the value of each item on hand has been computed, add all item totals together to obtain the total inventory value.
  1. Your business manager reviews the counts and the valuation to ensure that they are accurate and reasonable. He/she must review both the count sheet notations and a comparison of counts to sales records, for potentially obsolete inventory.
If inventory is determined to be obsolete, or the quantity is significantly greater than anticipated sales, adjust the valuation downward to reflect an estimate of the item’s market value (the amount of future estimated sales revenue likely to be generated).
  1. For most units, UAFR will post the adjustment based on your Year-End Fact sheet data. If your unit opts to adjust its own Banner record, use a journal voucher for an amount equal to the final valuation, before you submit the Fact Sheet:
  • Perpetual inventory units:
  • Record an inventory increase as a credit to Inventory for Resale - Over and Short (Operating Ledger [OL] account 187102) and a debit to Inventory for Resale (General Ledger [GL] account 55000).
  • Record an inventory decrease as a debit to Inventory for Resale - Over and Short (OL account 187102) and a credit to Inventory for Resale (GL account 55000).
  • Record any inventory decreases that result from obsolescence by debiting Inventory for Resale - Obsolete Inventory (OL account 187103) and crediting Inventory for Resale (GL account 55000).
  • Periodic inventory units:
  • Record an inventory increase as a credit to Purchase of Goods for Resale (OL account 187100) and a debit to Inventory for Resale (GL account 55000).
  • Record an inventory decrease as a debit to Purchase of Goods for Resale (OL account 187100) and a credit to Inventory for Resale (GL account 55000).
  • Record any inventory decreases that result from obsolescence by debiting Inventory for Resale - Obsolete Inventory (OL account 187103) and crediting Inventory for Resale (GL account 55000).
  1. Include the inventory valuation as of June 30 on the Year-End Fact Sheet that you submit to UAFR. If the physical inventory was not conducted on June 30, use the records of vendor shipments and sales to determine the value as of June 30 for submission on the Fact Sheet.

Monitor a Self-Supporting Fund
Report on Self-Supporting Activities in the Year-End Fact Sheet
Assess Your Merchandise Inventory Management Practices
Request an Exemption from Using a Perpetual Inventory System

Last Updated: February 22, 2016 | Approved: Senior Associate Vice President for Business and Finance | Effective: January 2013

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